The
higher ratios of assets to liabilities being reported by many public pension systems
in fiscal 2014 under new Governmental Accounting Standards Board Statement 67 (GASB
67) should be viewed with caution, Fitch Ratings warns.

The
agency says most public pension systems are reporting materially higher asset
values under the new GASB standards, reflecting immediate recognition of several years of strong market gains not
yet fully incorporated under the asset smoothing practices allowed by previous
GASB standards. According to Fitch, reported asset values are now fully subject
to market cyclicality, and thus the ratio of assets to liabilities reported by
systems will rise and fall far more sharply than the funded ratio reported under
prior GASB standards.

“In
an accident of timing, the transition to GASB 67 is taking place at a very
favorable moment in the economic cycle for reporting asset valuations. In most
cases, the market value of assets reported by systems under GASB 67 is much
higher than the smoothed asset value reported previously,” says Douglas
Offerman, senior director in Fitch’s states group.

The
agency notes the transition is having little effect on the way total
liabilities are calculated for the majority of systems that had already used
certain actuarial assumptions required by the new standards. Minimal credit
impact is expected from the transition.

A special report
titled ‘New Pension Perspectives’ is available on the Fitch Ratings web site at
www.fitchratings.com. A subscription
is required.